The Growing Debate Over Prepaid Debit Cards

At an event in Durham, N.C. on Wednesday, Consumer Financial Protection Bureau director Richard Cordray announced that the agency is “decid[ing] how we should go about regulating prepaid cards to better protect consumers and to provide clear rules for prepaid providers.”

The rapidly growing prepaid market is attracting both banks and non-banks, and more Americans, especially those classified as “unbanked” or “underbanked” are using these cards as de facto checking accounts.

The CFPB is concerned because these cards don’t have the disclosure requirements or protections of conventional checking accounts. “And that is especially troubling because the people who use prepaid cards are, in many instances, the most vulnerable among us,” Cordray said.

After his speech, there was a panel discussion and an open-mic session, during which consumer advocates and financial industry executives stated their cases for why various aspects of prepaid cards should or shouldn’t be regulated. Several ordinary people who self-identified as prepaid debit users also talked about what they liked and didn’t like about their cards.

Prepaid Debit as Regulatory Dodge: Martin Eakes, CEO of the Center for Responsible Lending, accused financial institutions of playing regulatory arbitrage, using prepaid debit cards as an end run around rules that to which checking account-linked debit cards are subject. Large prepaid providers do generally conform to the rules that dictate what happens when a customer’s bank or credit card is lost or stolen, as well as structure their accounts so prepaid users are covered by FDIC insurance on what’s called a “pass-through” basis. But right now, there’s no way for a customer to know for sure. Consumer advocates and Jeremy Kuiper, managing director of the payment solutions group at Bancorp Bank, expressed support for requiring FDIC protection for funds deposited onto prepaid debit cards.

Harm from Arbitration: Eakes also called for the elimination of mandatory arbitration clauses in cardholder agreements and said prepaid cards shouldn’t be subject to any kind of insufficient funds or overdraft penalties. These clauses, which are becoming increasingly common in the terms and conditions of everything from credit card agreements to cell phone contracts, prohibit customers from banding together and filing a class-action lawsuit if something goes wrong. Since these clauses are generally buried in pages of legalese rendered in tiny fonts, a lot of people don’t notice them, but consumer advocates and some legal experts say they’re bad news. “Class actions are the only realistic remedies for consumers,” attorney Bruce Rogow told TIME Moneyland in an earlier story.

Prepaid Shouldn’t Include Credit: Eakes and others who spoke during the panel discussion as well as in the open-mic session that followed unanimously said that there’s no place for credit — via overdraft or direct deposit advances, which advocates call payday lending by another name — in a prepaid debit card. NetSpend’s Henry he defended his company’s overdraft practices, though. He there were buffers in place before customers were hit with a fee, and that those fees were cheaper than bank overdrafts.

Building Savings Via Prepaid: Dan Henry, the CEO of prepaid provider NetSpend Corporation, touted his company’s offering that has a linked savings account. People on both sides of the spectrum spoke in favor of making opportunities for saving and building wealth available on more prepaid debit cards. Many prepaid card users who spoke during the open-mic session and use their cards as substitute bank accounts, said they receive their pay via direct deposit onto the card. Giving these customers the chance to accumulate a separate pool of savings is a good way to help them avoid the need for expensive, risky loan products if they are hit with an unexpected expense.

The Real Cost of Fees: Deyanira Del Rio, associate director of low-incom advocacy group Neighborhood Economic Development Advocacy Project, said the expense of prepaid cards is a burden and that NEDAP “typically” sees people paying $25 to $50 each month in fees on their prepaid debit cards. Not surprisingly, those in the industry disagreed with this assessment. Kuiper he decried what he called the “false assumptions” of consumer advocacy group studies. The industry representatives present argued that limiting fees would hurt customers by preventing the development of better products. For some context on fees, studies by Consumer Action and CardHub.com measured how much it would cost someone using a prepaid card as a checking account. They ran average use scenarios on a variety of cards and came up with top monthly averages of $27 and $24.32, respectively.

Prepaid as Barrier to Mainstream Banking: A recent New York Times article described how big banks are beginning to steer low-income customers — even ones who come into a branch with the intention of opening a checking account — towards prepaid cards that can be costlier. Del Rio referenced this two-tiered marketing structure and expressed concern that prepaid cards in their current form are “a wedge to keep people out” of mainstream banking, and that big banks getting into the prepaid market would steer low-income or financially unsophisticated consumers toward prepaid products instead of traditional checking accounts.

Fees Should be Simple, Transparent: Prepaid card users who spoke said they wanted clear and up-front information about fees as well as assurance that they would be protected if the bank holding the funds failed or if their card was used fraudulently. Recent college grad and prepaid card user Eric Jefferson held up the solicitation he received in the mail for a prepaid card. While it touted certain free features, he said he didn’t learn about other fees until after he’d already signed up for a card and loaded money onto it. “Be transparent,” he told the panel. “Whatever the fees are … the fine print should be see-through.”